Nov 17, 2016 10:52:56 AM

All you need to know about debt consolidation

Topics: Australia, Debt Consolidation, Mortgages 0

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Does it feel as if you can’t keep track of all of your debt? Are you missing repayment dates? Do you need help reducing your debt? If you need to take control of your debt, a debt consolidation loan may be the answer.

While it may feel a little like you’re simply moving your problem to another loan, a debt consolidation loan can help simplify your repayments and can even help reduce your debt over time. To help you decide whether or not a debt consolidation loan is the right decision for you, here are a few things you need to know.

Consolidate your debt
A debt consolidation loan lets you transfer all of your credit card debt, any outstanding HP debt or personal loans to one loan, which means you make one repayment each month instead of multiple repayments. This lets you focus on paying off a single debt instead of trying to decide which account to pay off first. And if you have any extra money set aside, you can simply pay that into your debt consolidation loan to further reduce your total balance.

Lower interest rate
An added benefit of consolidating debt into a single loan account is that you could save on the amount of interest you pay back. In most cases, the interest rate charged on your debt consolidation loan is considerably lower than that of your credit card or personal loan. For example, if you’re consolidating your debt across three credit cards with interest rates of 17%, 19% and 22%, you could reduce your overall repayments significantly when paying back your consolidated loan with an interest rate of just 15%.

More time to pay back
Because your interest rate is lower, your monthly repayments are lower, and even just a little wiggle room can make a big difference to your cash flow. And because you’ve re-negotiated your debt into one manageable loan, you have more time to pay back your debt.

Debt consolidation is not debt elimination!
While debt consolidation allows you a little breathing space to pay back what you owe at a more manageable interest rate over a longer time, you still need to clear all of your debt. So don’t be fooled into thinking that because you’ve cleared the debt from your credit cards, it’s an invitation to spend. You may want to consider cutting up your credit cards once you’ve consolidated your debt or you could get trapped into spending even more.

Do the maths before you decide
While your interest rate is lower, so are your monthly repayments, which means you’re not paying off as much of your debt as you were previously. You’ve also extended the time it will take you to pay back your debt so it could add months or even years onto the length of time you’ll repay your debt. It’s worthwhile doing your calculations and talking to a finance broker or adviser about your situation before deciding on a debt consolidation loan. And you definitely want to shop around and compare debt consolidation loans available to you in order to find the best solution.

Get financial advice
While a debt consolidation loan is a big first step to financial freedom, you need a responsible plan of action to avoid racking up any more debt. If you’re swamped with credit card debt and personal loans, it’s a good idea to get sound financial advice before you make any decisions. Get in touch with a Mortgage Express financial adviser or broker to plan your financial future.